Vietnam freight transport report q2 2013

... Vietnam' s freight industry would therefore be detrimental, as demand would slow significantly © Business Monitor International Page Vietnam Freight Transport Report Q2 2013 SWOT Freight Transport Vietnam. .. Business Monitor International Page 10 Vietnam Freight Transport Report Q2 2013 Vietnam Freight Transport Industry SWOT - Continued • Growing international interest in Vietnam as a growth market within... negatively affect Vietnam' s freight transport sector © Business Monitor International Page 11 Vietnam Freight Transport Report Q2 2013 Business Environment SWOT Analysis Strengths ■ Vietnam has a

Q2 2013 www.businessmonitor.com

VIETNAM

FREIGHT TRANSPORT REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Q2 2013

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: February 2013

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BMI Industry View 7

SWOT 10

Freight Transport 10

Business Environment 12

Economic 13

Political 14

Industry Forecast 15

Road Freight 18

Table: Road Freight, 2010-2017 20

Inland Waterways 20

Table: Inland Waterway Freight, 2010-2017 22

Rail Freight 22

Table: Vietnam Transport Network Length (km) 22

Table: Rail Freight, 2010-2017 23

Air Freight 23

Table: Air Freight, 2010-2017 25

Maritime Freight 25

Table: Maritime Freight, 2010-2017 27

Trade 27

Table: Trade Overview, 2010-2017 27

Table: Key Trade Indicators, 2010-2017 28

Table: Main Import Partners (US$mn) 29

Table: Main Export Partners (US$mn) 29

Market Overview 30

Industry Trends And Developments 35

Maritime 35

Multimodal 36

Road 37

Air 38

Company Profile 39

Vietnam Airlines Cargo 39

Vietnam Petroleum Transport Company (VIPCO) 41

Vietnam National Shipping Lines (Vinalines) 43

Regional Overview 46

Political Outlook 46

Domestic Politics 46

Table: Vietnam Political Overview System of Government 47

Long-Term Political Outlook 48

Global Industry Overview 52

Global Oil Products Price Outlook 52

Table: BMI's Oil Price Forecasts, Average Price (US$/bbl) 52

Table: BMI's Refined Products Forecasts 53

Refiners: Is The Party Over? 55

Jet Fuel: Middle East & Africa Remain Positive As Global Air Traffic Slumps 58

Table: Total Air Freight & Passenger Volumes 60

Gasoline And Diesel: Demand Destruction Takes A Toll 60

Naphtha: Asia Stays Afloat While Europe Sinks 61

Bunker Fuels: Trans-Pacific Route Rebound Amid High Prices 61

Macroeconomic Forecasts 64

Ratings Downgrade Failed To Surprise Investors 65

Early Signs Of A Recovery 67

Threat Of Slower Growth Yet To Undermine Efforts For Reforms 67

Expenditure Breakdown 67

Table: Vietnam - Economic Activity 68

Demographic Forecast 69

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 70

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 71

Table: Vietnam's Key Population Ratios, 1990-2020 72

Table: Vietnam's Rural And Urban Population, 1990-2020 72

Methodology 73

How We Generate Our Industry Forecasts 73

Transport Industry 74

Sources 74

BMI Industry View

A projected lacklustre recovery in global demand in 2013 leads us to envisage a less than impressive pickup

in Vietnamese exports, which will have a knock-on effect on the country's freight industry Additionally,Vietnam's main export partners, the US, China and Japan, are all finding it hard to shake off the economichangover of 2012 Vietnam's economy, however, remains on track for a robust recovery in 2013, and weview consensus estimates on growth as being overly pessimistic Also, looking at the breakdown of exports,

we are seeing encouraging evidence that Vietnam is becoming less reliant on refined crude imports andcould soon become a net exporter of crude oil over the coming years

Garment producers in Vietnam are preparing for the Trans-Pacific Partnership agreement (TPP) that wouldincrease the country's garment exports to the US to up to US$22bn by 2020 Vietnam presently exports US

$7.6bn worth of garments to the US, and is likely to see this rise to US$13bn worth of garments by 2020.However, the country relies heavily on China, Taiwan and South Korea for raw material and in 2012 hadimported US$10.77bn worth of materials by November 15 Le Quoc An, a senior advisor to the VietnamTextile and Apparel Association, has said that the country would have to reduce this import dependence inorder to export an additional US$9bn worth of products to the US by 2020 The TPP is expected to createmillions of job opportunities in the area of garment production

We acknowledge that the risk of a potential surge in commodity prices in 2013 - especially food prices,which make up around 40% of the CPI basket - could turn out to be a wildcard for policymakers But fornow, we believe that overall conditions in Vietnam support our forecast for real GDP growth to come inrelatively strong at 7.0% in 2013

By mode, the outperformer in year-on-year (y-o-y) tonnage terms is set to be the road freight sector, with2013's growth figure forecast to come in at just over 7% The air freight sector will enjoy healthy growth ofjust under 5% this year, while rail freight's annual tonnage growth will be a less impressive 3.1% InVietnam's shipping sector, the Port of Ho Chi Minh City remains by far the country's largest port and willalso be Vietnam's strongest performer in terms of tonnage handled this year - forecast to increase 7.56%year-on-year (y-o-y) in 2013 to reach 38.75mn tonnes, compared with the Port of Da Nang's predictedannual growth of 4.33% (to 4.16mn tonnes) On the other hand, the Port of Da Nang will enjoy the higherlevels of annual growth in terms of containers handled, with y-o-y growth set to come in at double figures in

2013, as opposed to the Port of Ho Chi Minh City's lower growth of 8.03%

Headline Industry Data

■ 2013 rail freight tonnage is set to increase by 3.12% to 8.71mn tonnes

■ 2013 air freight tonnage is forecast to rise by 4.8% to 216,280 tonnes

■ Tonnage handled at the Port of Ho Chi Minh City in 2013 is forecast to grow 7.56%, whereas tonnagehandled at the Port of Da Nang is forecast to increase 4.33%

■ 2013 road freight tonnage is forecast to grow by 7.03% to 754.16mn tonnes

■ 2013 total trade is forecast to rise by 5.70%

Key Industry Trends

Government Must Delay Launch Of Cai Mep-Thi Vai Port Complex The launch of the Cai Mep-Thi Vai

port complex in the south of the country has been delayed by the government of Vietnam A delay had beenproposed by Vietnam Business Forum 2012's Infrastructure Working Group and representatives from someforeign-invested businesses providing port services, it was reported in December 2012

CEVA Logistics And Indo Trans Logistics Group Form JV

CEVA Logistics of the UK and Vietnam's Indo Trans Logistics Group have announced a joint venture (JV), to be called CEVA Logistics (Vietnam), in a move designed to strengthen CEVA Logistics' position

in South East Asia CEVA Logistics (Vietnam) will provide end-to-end integrated supply chain services andwill be based in Ho Chi Minh City CEVA Logistics had at first offered only freight management serviceswhen it began operations in the country 12 years ago

Roads Construction Potential Limited By Viability Concerns

Vietnam's desire to improve its road infrastructure continues to be hampered by numerous issues, such asdeclining government spending, the lack of economic viability for toll roads and a deficiency in regulationsand government institutions that causes delays in site clearances and cost overruns We believe theseproblems are not likely to be resolved anytime soon and we maintain a conservative outlook on constructionactivity in Vietnam's road infrastructure sector

Key Risks To Outlook

The Thai and Vietnamese transport ministries recommended at the end of 2012 that their respective

governments extend the Khon Khen-Tien Sa Port road from Laem Chabang Port in Thailand to Hanoi andHaiphong in Vietnam, reported the Saigon Times The aim is to improve the efficiency of the road.Ifcompleted, this will provide upside risk to the Vietnamese freight industry going forward

With the US by far and away Vietnam's largest export partner, the Asian country's fortunes are very muchintertwined with those of the global superpower It will come as a negative then that we are maintaining our2.0% real GDP growth forecast for the US for 2012 and our 2.1% projection for 2013 The US economy isrunning dangerously close to 'stall speed', by which we mean that any major unanticipated headwind would

be enough to push it into recession The knock-on effect on Vietnam's freight industry would therefore bedetrimental, as demand would slow significantly

Freight Transport

Vietnam Freight Transport Industry SWOT

Strengths ■ Vietnam's strong domestic growth rate, coupled with its geography - it stretches for

thousands of kilometres on a north-south axis, creates a need for long-distancefreight haulage

■ A recovery of activity levels at the nation's ports in 2010 is expected to continue overthe mid-term to 2016

■ Vietnam's location on the South China Sea gives the country access to the main Asian shipping routes, as well as access to the developing land transport links withASEAN countries, allowing the country scope to develop its trade logistics

inter-Weaknesses ■ The generally poor state of the road network Despite new highway construction, only

13.5% of the network is considered to be in good condition Just 26% of the networkhas two or more lanes and only 29% is tarred

■ Traditionally low investment in rail, with the potential for cost-effective bulk rail freightbeing underutilised

■ Decades of under-investment have left the country with a port infrastructure systemthat is poor by international standards Overcapacity is a growing problem

■ Unresolved business environment issues and lack of significant improvement inaccess to infrastructure financing means that we remain very conservative on thegrowth potential of Vietnam's freight sector

■ A slowdown affecting the US economy has a knock-on effect on Vietnam due to itbeing the Asian country's largest export partner

Opportunities ■ The beginnings of local commercial vehicle production, which will help improve the

stock of lorries used by road haulage companies

■ Chinese investment could bring about much needed improvements in the rail sector

Vietnam Freight Transport Industry SWOT - Continued

• Growing international interest in Vietnam as a growth market within the box shippingsector

Threats ■ Vietnam risks losing out to neighbouring countries if it is unable to develop its

infrastructure to keep up with the pace of demand

■ Vietnam is vulnerable to any slowdown in Chinese investment and to political risk inthe sensitive South China Sea, subject to competing sovereignty claims

• A drop in international demand for exports would negatively affect Vietnam's freighttransport sector

Business Environment

SWOT Analysis

Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country

attractive to foreign investors

■ Vietnam's location - its proximity to China and South East Asia, and its good sea links

- makes it a good base for foreign companies to export to the rest of Asia andbeyond

Weaknesses ■ Vietnam's infrastructure is still weak Roads, railways and ports are inadequate to

cope with the country's economic growth and links with the outside world

■ Vietnam remains one of the world's most corrupt countries According toTransparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123rdout of 176 countries

Opportunities ■ Vietnam is increasingly attracting investment from key Asian economies, such as

Japan, South Korea and Taiwan This offers the possibility of the transfer of high-techskills and know-how

■ Vietnam is pressing ahead with the privatisation of state-owned enterprises and theliberalisation of the banking sector This is likely to offer foreign investors new entrypoints

Threats ■ Ongoing trade disputes with the US, and the general threat of American

protectionism, which will remain a concern

■ Labour unrest remains a lingering threat A failure by the authorities to boost skillslevels could leave Vietnam a second-rate economy for an indefinite period

SWOT Analysis

Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with

GDP growth averaging 7.1% annually between 2000 and 2011

■ The economic boom has lifted many Vietnamese out of poverty, with the officialpoverty rate in the country falling from 58% in 1993 to 14.0% in 2010

Weaknesses ■ Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving

the economy vulnerable to global economic uncertainties in 2012 The fiscal deficit isdominated by substantial spending on social subsidies that could be difficult towithdraw

■ The heavily-managed and weak currency reduces incentives to improve quality ofexports, and also keeps import costs high, contributing to inflationary pressures

Opportunities ■ WTO membership has given Vietnam access to both foreign markets and capital,

while making Vietnamese enterprises stronger through increased competition

■ The government will in spite of the current macroeconomic woes, continue to moveforward with market reforms, including privatisation of state-owned enterprises, andliberalising the banking sector

■ Urbanisation will continue to be a long-term growth driver The UN forecasts theurban population rising from 29% of the population to more than 50% by the early2040s

Threats ■ Inflation and deficit concerns have caused some investors to re-assess their hitherto

upbeat view of Vietnam If the government focuses too much on stimulating growthand fails to root out inflationary pressure, it risks prolonging macroeconomicinstability, which could lead to a potential crisis

■ Prolonged macroeconomic instability could prompt the authorities to put reforms onhold as they struggle to stabilise the economy

SWOT Analysis

Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the next five years The party system is generally conducive to short-term political stability

one-■ Relations with the US have witnessed a marked improvement, and Washington seesHanoi as a potential geopolitical ally in South East Asia

Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party

■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tightcontrol over political dissent

Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has

acted to clamp down on graft among party officials

■ Vietnam has allowed legislators to become more vocal in criticising governmentpolicies This is opening up opportunities for more checks and balances within theone-party system

Threats ■ Macroeconomic instabilities in 2012 are likely to weigh on public acceptance of the

one-party system, and street demonstrations to protest economic conditions coulddevelop into a full-on challenge of undemocractic rule

■ Although strong domestic control will ensure little change to Vietnam's political scene

in the next few years, over the longer term, the one-party-state will probably beunsustainable

■ Relations with China have deteriorated over recent years due to Beijing's moreassertive stance over disputed islands in the South China Sea and domestic criticism

of a large Chinese investment into a bauxite mining project in the central highlands,which could potentially cause wide-scale environmental damage

Industry Forecast

Vietnam's freight transport sector will benefit from the uptick in domestic growth and also the growthoutlook of its two main trade partners, the USA and China, which will drive export growth Vietnam'slogistics sector has been developing to keep up with the country's increasing role as Asia's factory,

especially in the manufacturing of clothing and shoes Vietnam's connections to its key export partners hasbeen improving over the last three years, with the country now boasting direct container line services to the

US and Europe

Vietnam's economic growth is picking up While the country's economy continued to expand at a reasonable

rate of 5% on 2012 this year marked the second year in which Vietnam's real GDP slowed In 2013 BMI

forecasts the country's economic expansion to get back on its growth trajectory with Vietnam's real GDPprojected to grow by 6.95%

Economic Growth Getting Back On CourseVietnam Real GDP Growth, % change y-o-y

e/f = BMI estimate/ forecast Source: Asian Development Bank, General Statistics Office

The country's medium-term growth will place even more pressure on the country's logistics sector withVietnam's economy forecast to expand quicker over the next four years, with an average growth of 7%predicted between 2013-2017 compared to an average annual growth of 5.9% between 2008-2012.

To keep pace with this growth Vietnam will continue to need to invest in its logistics sector, but BMI

expects a lot of this investment to come from outside logistic and freight transport companies which will bekeen to enter and expand into this high growth market We have already witnessed this to some extent inVietnam's port sector, with considerable investment being made by container shipping lines and global portoperators in the development of modern box terminals at Vietnam's ports

This investment in the country's maritime sector has ensured that Vietnam's manufacturing growth can beachieved with greater links between the country and its main trade partner the US Direct container shippinglinks between Vietnam and the US have been in operation since 2009, which have cut both time and cost, aspreviously Vietnamese shipments had to be transshipped via Singapore

Demand from the US for Vietnam's manufactured goods looks set to continue growing, with Vietnam'sexports set to benefit from the recovery in the US economy We have revised up our US real GDP forecastfor 2013 to 2.3% an improvement on the estimated increase of 2.2% in 2012 Over the medium term(2013-2017) we forecast the US economy to expand by an average 2.4% per annum

Title: China And The US To Drive Export GrowthLHC: Vietnam's Main Trade Partners By % 2011 RHC: China and US Real GDP growth, % change y-

o-y

e/f = BMI estimate/ forecast Source: CIA World Factbook, National Bureau of Statistics and BEA

Vietnam's export outlook will also continue to be bolstered by China's growth outlook Although we projectChina's economic growth to slow over the medium term, the country's real GDP growth outlook remainsrobust, estimated at 7.5% in 2013 and 6.4% over the medium term

Vietnam plays a key role in China's coal supply chain Vietnam is China's fifth-largest coal supplier

providing the country with the thermal coal it requires for its power stations Vietnam's role in this supply

chain looks set to continue, although BMI highlights that China is trying to decrease its power sectors'

reliance on coal While we believe that the percentage supplied by coal fired power plants within China'soverall energy mix will slip over the medium term, it will nevertheless remain above 70%

Playing A Major Role In China's Coal Supply Chain

China Coal Imports By Partner 2012 (tonnes)

Source: China Custom

BMI believes that Vietnam's textile sector will also benefit from the development of China's middle class,

as the country starts to import more from abroad

Road Freight

Road Dominates And Offers Best Links Into China

Despite its low standing in road infrastructure, with the Global Economic Forum ranking Vietnam's roads at

123 out of 142 globally, and placing it last in comparison with 13 of its Asia peers, the country's logisticsneeds are primarily met by road

In 2013 we predict that road freight volumes in Vietnam will account for 80.7% freight carried in thecountry

Road ReliantVietnam Freight Mode Breakdown By Market Share 2013

Source: BMI forecast

We forecast that growth in road freight volume will strengthen in 2013 in line with the pickup in Vietnam'seconomic recovery and the stronger export outlook for the country We project road freight volumes toincrease by 7%, up from an estimated 6.1% in 2012, to reach 754.2mn tonnes in 2013

This growth in road freight volumes, while robust, is down on the double-digit growth figures that thisfreight mode achieved in the previous five years Over the medium term we forecast road freight volumegrowth will average 6.6% per annum reaching a projected 970.1mn tonnes in 2017

There is, however, upside risk to this forecast as more foreign logistics companies, with considerable road

freight expertise expand in Vietnam Recently both FedEx and DHL have been expanding their role in

Vietnam While some companies are breaking into Vietnam by developing their own operations in thecountry, others are getting a head start by acquiring and joining up with domestic freight operators This is

the route CEVA Logistics has taken entering into a joint venture with its long-term business partner Indo Trans Logistics Group.

Road freight plays a key role not only in Vietnam's domestic logistics sector, but also in the country's exportsupply chain Road is the main form of transport linking Vietnam's factories to the country's ports and alsoplays a key role in linking Vietnam with its second-largest export partner China.

Vietnam's northern border links the country's with the south of China Road links continue to be developed

between the two and with them trucking services Kerry Asia Road Transport (Kart), for example, offers

a twice-weekly trucking link connecting Shenzhen and Hanoi

Table: Road Freight, 2010-2017

Road freight, '000

tonnes 587,014.20 663,913.10 704,610.97 754,159.26 805,226.64 858,429.28 913,443.34 970,287.72

- % change y-o-y 14.29 13.1 6.13 7.03 6.77 6.61 6.41 6.22 Road freight, mn

tonnes/km 36,179.00 40,231.00 42,383.36 45,369.02 48,446.33 51,689.07 55,084.19 58,592.19

- % change y-o-y 14.54 11.2 5.35 7.04 6.78 6.69 6.57 6.37

e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam

Inland Waterways

Waterways Play A Major Role; Mekong Offers Trade Links With Neighbours

Vietnam's inland waterways play a considerable role in the country's freight transport sector making it thesecond-largest freight transport mode in the country In 2013 we estimate that 172.7mn tonnes of freightwill be carried by the nation's waterways, a year-on-year (y-o-y) growth of 5.3% In terms of total freighttransport projections for Vietnam in 2013 we calculate that inland waterways will account for 18.5%

Mekong Offers Trade Connections

Map of the Mekong River

Source: BMI

The country's inland waterways stretch for 17,702km, of which 5,000km is navigable for vessels with adraught of up to 1.8m Vietnam's dense network of waterways ranks its seventh in the world in terms oflength

The country's inland waterways include the Mekong River, which enables freight connections with

Vietnam's neighbours

Table: Inland Waterway Freight, 2010-2017

Inland waterway

freight, '000 tonnes 144,227.00 157,207.40 163,951.60 172,671.63 181,659.35 191,130.25 201,046.17 211,291.77

- % change y-o-y 4.73 9 4.29 5.32 5.21 5.21 5.19 5.1 Inland waterway

Network Lacking And No Impetus To Develop It

Despite rail's potential as an overland trade link for Vietnam with its three neighbours the mode's role in thecountry's freight transport sector remains small In 2013 we forecast Vietnam's rail freight volumes toaccount for just 0.8% of the total with the country's rail network transporting just 7.5mn tonnes of freight

Although like the other freight modes, we expect volumes to increase in line with Vietnam's economicgrowth outlook, rail freight volumes (while forecast to grow by 16.9% over the next five years) will only behandling 8.6mn tonnes in 2017; this is still way below that which we forecast for the nation's other mainfreight modes, road and inland waterways

There are two key factors that we believe have held back Vietnam's rail freight development and willcontinue to do so

Table: Vietnam Transport Network Length (km)

The first is the quality of Vietnam's railway infrastructure The Global Economic Formula gives Vietnam'srail infrastructure a low ranking, placing it 71st globally out of 123 countries measured This ranking places

it 12th out of its 13 Asian peers A major problem for Vietnam's rail freight development is the relativeshortness of the country's rail network Vietnam's railway lines extend for just 2,632km; this compares withthe country's 180,549km network of roads and 17,702km network of inland waterways

The second drawback for freight rail development in Vietnam is its gauge incompatibility with China.Vietnam's network is dominated by narrow gauge, which accounts for 80% of the total While the countryhas some standard gauge track, this system only accounts for 20% of the total

This means that rail freight trade between Vietnam and China is slowed by gauge changes, making roadfreight a more cost- and time-effective alternative; this stymies potential rail-freight projects between thetwo nations

BMI highlights that developments in Vietnam's rail network are taking place, but these have been focused

on expanding the country's passenger network (e.g a planned high-speed railway link between Vietnam andLaos)

Table: Rail Freight, 2010-2017

Rail freight, '000 tonnes 7,861.50 7,234.10 7,315.85 7,544.24 7,779.64 8,027.69 8,287.41 8,555.75

- % change y-o-y -4.68 -7.98 1.13 3.12 3.12 3.19 3.24 3.24 Rail freight, mn tonnes/km 3,960.90 4,098.50 4,199.73 4,401.32 4,651.09 4,914.28 5,189.85 5,474.57

- % change y-o-y 2.49 3.47 2.47 4.8 5.67 5.66 5.61 5.49

e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam

Air Freight

Airfreight On Growth Trajectory As Vietnam Gets Better Connected

Vietnam's air freight sector may only account for a small percentage of the country's freight transport sector;although this is not expected to change there is a lot of growth potential in this sector As intra-Asia airfreight routes develop, Vietnam is becoming better connected with air freight routes internationally Thekey sectors that are demanding air freight as a transport option, include consumer electronics and

pharmaceuticals

In line with Vietnam's economic growth and the projected pick up in international air freight BMI forecasts

the country's air freight volume growth to strengthen in 2013 We forecast Vietnam's air freight volumes toincrease by 4.8% to reach 216,280 tonnes in 2013 up from the estimated y-o-y growth of 3.6% in 2012.Over the medium term (2013-2017) we forecast Vietnam's air freight levels to grow on average per annum

by 5.6% and by 31.3% over the full period to reach 270,990 tonnes

There are upside risks to these forecasts stemming from the continued interest of international air freightoperators in Vietnam Throughout 2012 Vietnam's Ho Chi Minh City airport became better connected with

more air freight routes and BMI expects this trend to continue in 2013 and beyond.

Taking OffVietnam Air Freight, '000 tonnes

e/f = BMI estimate/ forecast Source: General Statistics Office of Vietnam

BMI expects the increase of air freight connections for Vietnam will come through the development of intra-Asia air freight routes In 2012 Air China Cargo and Malaysia's MASKargo added services to Ho Chi

Minh City

Vietnam is also becoming globally better connected by air In 2012 Emirates added a link with the country and Dubai and in 2013 Finnair announced that it planned to launch new cargo routes to Hanoi.

While still at the development stage Vietnam is seeking to play a greater role in the electronics supplychain, a key source of demand for air freight transport options One examples has been the impact the localproduction of iPhones has had on China's air freight sector Plans are in place for Vietnam-based facilities toproduce Nokia phones, iPods, PlayStations and Sony laptops, which will all drive up air freight demand.

Vietnam's pharmaceutical sector exports much of its output, but the country also imports a lot Vietnam'strade in pharmaceuticals is forecast to grow in the double digits in percentage terms over the medium term.The global pharmaceutical sector is increasingly turning to the aviation sector to meet its freight needs, withthe sector offering savings in transport time, along withy environment controlled options, which are vital forthe transport of some medicines and vaccinations

Table: Air Freight, 2010-2017

Air freight, '000 tonnes 190.1 199.2 206.37 216.28 229.01 242.43 256.48 270.99

- % change y-o-y 36.17 4.79 3.6 4.8 5.89 5.86 5.79 5.66 Air freight, mn tonnes/km 426.8 449 466.96 494.29 522.46 552.15 583.23 615.34

- % change y-o-y 34.81 5.2 4 5.85 5.7 5.68 5.63 5.51

e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam

Maritime Freight

Maritime Box Role To Continue Expanding

Vietnam's ports and shipping sectors play a role in the global dry, liquid and container sector As

highlighted earlier Vietnam plays a considerable role in China's coal supply chain, with the dry bulkcommodity being shipped out of Vietnam and into China's main coal port of Qinhuangdao Vietnam is anoil-producing nation, but its consumption needs have come to outweigh its supply and so the country ismaking use of the liquid bulk shipping sector to import oil

It is in the container shipping sector that Vietnam has seen the most development, a trend which is expected

to continue As Vietnam has become the factory of Asia, with an emphasis on the development of clothingand shoe exports, the country's ports and shipping links have had to keep up As mentioned, considerableinvestment was ploughed into Vietnam's container terminal sector over the last five years, with internationalplayers participating This investment is now starting to yield results, with Vietnam now directly connected

to the key demand market of the US (in 2009) and Europe (in 2010)

Getting Better ConnectedUNCTADstat Liner Connectivity Index For Asia 2004 and 2012

Source: UNCTADstat

The development of Vietnam's liner connections has been highlighted by data from UNCTAD's linerconnectivity index In 2004 Vietnam was ranked lowest out of its 14 Asian peers in terms of container lineconnectivity, but by 2012 it had jumped up the rankings to eighth place out of its 14 Asian neighbours

Vietnam's growing role in the global container shipping sector is also in evidence in the port of Ho ChiMinh's box throughput In 2013 we expect container volumes to increase by 7.6% and over the mediumterm by an annual average of 6.6% For more information, data and analysis of Vietnam's shipping sector

please see BMI's Vietnam Shipping Report.

Table: Maritime Freight, 2010-2017

Nominal

Imports, US$bn 90.9 111.98 127.53 144.08 161.12 179.08 198.37 218.12

- % change y-o-y 24.06 23.18 13.89 12.98 11.82 11.15 10.77 9.96 Exports, US$bn 80.27 106.8 120.43 138.14 156.84 176.67 197.94 219.74

- % change y-o-y 26.14 33.06 12.76 14.7 13.54 12.64 12.04 11.01 Total trade, US$bn 171.17 218.78 247.96 282.22 317.96 355.75 396.31 437.86

- % change y-o-y 25.03 27.81 13.34 13.82 12.66 11.89 11.4 10.48

e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam, BMI

Table: Key Trade Indicators, 2010-2017

Agricultural raw materials

Imports, US$mn 2,666.48 3,758.86 4,248.51 4,884.81 5,556.72 6,269.16 7,045.44 7,820.77

- % change y-o-y 28.31 40.97 13.03 14.98 13.76 12.82 12.38 11 Exports, US$mn 3,436.62 3,385.63 3,893.09 4,433.35 4,989.36 5,575.72 6,298.49 6,877.69

- % change y-o-y 116.99 -1.48 14.99 13.88 12.54 11.75 12.96 9.2

Ores and metals

Exports, US$mn 594.33 800.03 910.44 1,053.91 1,205.41 1,366.05 1,537.59 1,714.75

- % change y-o-y 44.06 34.61 13.8 15.76 14.38 13.33 12.56 11.52 Imports, US$mn 3,300.36 4,357.33 5,013.60 5,712.29 6,431.37 7,189.69 7,958.80 8,823.66

- % change y-o-y 19.18 32.03 15.06 13.94 12.59 11.79 10.7 10.87

Iron and steel

Exports, US$mn 1,622.95 2,018.59 2,324.78 2,722.68 3,142.84 3,588.34 4,115.93 4,572.52

- % change y-o-y 202.25 24.38 15.17 17.12 15.43 14.18 14.7 11.09 Imports, US$mn 60,547.73 74,629.91 85,021.37 96,084.68 107,470.65 119,477.99 132,115.94 145,490.34

- % change y-o-y 17.8 23.26 13.92 13.01 11.85 11.17 10.58 10.12

Manufactured goods

Exports, US$mn 40,806.05 54,678.39 61,978.64 71,465.22 81,482.78 92,104.49 103,367.09 115,134.96

- % change y-o-y 21.6 34 13.35 15.31 14.02 13.04 12.23 11.38 Imports, US$mn 59,491.63 73,261.81 83,421.86 94,238.79 105,371.19 117,111.14 129,619.40 142,590.32

- % change y-o-y 24.01 23.15 13.87 12.97 11.81 11.14 10.68 10.01

Fuel

Exports, US$mn 11,085.59 17,200.25 19,311.56 22,055.19 24,952.37 28,024.29 31,414.11 34,728.70

- % change y-o-y 30.31 55.16 12.27 14.21 13.14 12.31 12.1 10.55 Imports, US$mn 9,659.44 14,041.36 16,054.43 18,197.66 20,403.40 22,729.51 25,239.57 27,787.51

- % change y-o-y 28.84 45.36 14.34 13.35 12.12 11.4 11.04 10.1

e/f = BMI estimate/forecast Source: UNCTAD, BMI

Table: Main Import Partners (US$mn)

China,P.R.: Mainland 2,158.84 3,138.55 4,595.10 5,899.70 7,391.30 12,710.00 15,652.10 16,441.00 Japan 2,504.65 2,982.06 3,552.60 4,074.10 4,702.10 6,188.90 - 7,468.09 Korea ) 2,279.60 2,625.44 3,359.40 3,594.10 3,908.40 5,340.40 7,066.30 6,976.36 Thailand 955.24 1,282.19 1,858.60 2,374.10 3,034.40 3,744.20 4,905.60 4,514.07 Singapore 2,533.49 2,875.82 3,618.40 4,482.30 6,273.90 7,613.70 9,392.50 4,248.36

Source: IMF's Direction of Trade Statistics

Table: Main Export Partners (US$mn)

United States 2,453.15 3,939.56 5,024.80 5,924.00 7,845.10 10,104.50 11,868.50 11,355.80 Japan 2,436.96 2,908.60 3,542.10 4,340.30 5,240.10 6,090.00 8,537.90 6,291.81 China, P.R.: Mainland 1,518.33 1,883.12 2,899.10 3,228.10 3,242.80 3,646.10 4,535.70 4,909.03 Switzerland 66.67 74.67 120.20 103.90 155.70 236.90 516.90 2,486.49 Australia 1,328.33 1,420.86 1,884.70 2,722.80 3,744.70 3,802.20 4,225.20 2,276.72

Source: IMF's Direction of Trade Statistics

Market Overview

Exports Provide Downside RiskAs we head into the second quarter of 2013, we believe that net exports

remain the biggest downside risk to our outlook for the Vietnamese economy given that we expect externaldemand to remain sluggish for the foreseeable future; this will undoubtedly have a detrimental impact on

the country's freight sector BMI expects private consumption will have grown at a relatively subdued pace

of 4.9% in 2012 before accelerating towards 5.6% in 2013 However, we note that the risk of a sustainedcollapse in exports and further bankruptcies among SMEs, could potentially lead to widespread job losses inexport-driven sectors Indeed, the ongoing problems evidenced at Vinalines are indicative of a deepermalaise in the Vietnamese shipping sector State-owned shipbuilder Vinashin was bailed out in 2010 whenits US$4.5bn debt threatened to bring down the entire Vietnamese economy Widespread investment in thecountry's infrastructure is necessary if Vietnam is to compete with regional peers

Healthy Medium Term BeckonsVietnam GDP Year-On-Year Growth

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 4

5 6 7 8 9

Source: Asian Development Bank, General Statistics Office

The economic headwinds that hit the US and the eurozone in 2012 should continue to act as a dampener onexternal demand throughout 2013 to some extent, especially in the case of the US, which is by some

distance Vietnam's top export partner In addition, another of Vietnam's largest export partners, China, is set

to see a GDP growth cool in 2013, as is Japan This suggests that production activity in the manufacturingsector and other export-based industries could face difficulties, with a negative effect on the freight

transport industry expected as a result

The US economy's pace of growth is set to slow over the next 10 years to a long-term rate of 2.4% as

deleveraging from a massive credit binge takes its toll Nonetheless, BMI believes that the US is going to

remain the world's greatest economic power over our 10-year forecast period to 2022 and beyond It must

be borne in mind that if the US sneezes, then figuratively, Vietnam catches a cold This is true in the freightindustry as a slowing in external demand will have a detrimental effect

Retail sales in Vietnam have moderated considerably since November 2010, when the State Bank ofVietnam (SBV) initiated its monetary tightening cycle Retail sales growth slowed from 32.5% year-on-year(y-o-y) in November 2010 to 22.6% y-o-y in June 2011, indicating that the measures have dampenedprivate consumption growth Nonetheless, retail sales remain at double-digit growthlevels, indicating thatprivate consumption remains resilient This supports our view that private consumption will remain resilient

on the back of robust labour market conditions and rising wages in Vietnam, boding well for containerisedimports However, public spending cuts and a subdued outlook on gross fixed capital formation (GFCF)growth due to high lending rates would lead to continued moderation in domestic demand throughout theyear

Prior to 2007, policymakers held that foreign direct investment (FDI) inflows into the export sector shouldgradually reduce the state's role in driving the economy, providing a spur for Vietnam's freight industry.However, recent economic data suggest that this has not been the case While exports have risen from76.9% of GDP in 2007 to 80.7% in 2011, mainly driven by private sector exports of processed food,agricultural products and mined resources to South East Asian countries, state-owned enterprises' share ofthe economy has remained stubbornly high at 33.7% of GDP in 2011, compared with 35.9% in 2007

The total share of the public sector in the economy is even larger at around 39% of GDP, when taking intoaccount joint-stock companies - in which the state holds a controlling stake (the private sector is allowed toinvest and share in the profits) From our perspective, further measures to reduce the state's control over theeconomy, and allowing the private sector to allocate capital more efficiently, will play a key role in

determining the country's growth prospects over the medium term

Over the longer term, imports will be boosted by Vietnam's young population, as younger populations aregenerally more supportive of private consumption The country has a population of 90.7mn, according to

estimates for 2013 by BMI, 60% of which is under 35 We forecast that the population will be 94.1mn by

2017, with 57% under 35, and will rise to 97.7mn by 2022

Road Freight Remains The Dominant Force In Tonnage Terms Road transport is the most advanced in

terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a marketshare of around 75% of domestic cargo Few foreign companies are present in the market and there aremany small, family-owned road freight companies operating informally

Investment Needed Across The Board

* Rail infrastructure is measured out of 123 Source: Global Economic Forums Competitiveness Index

Vietnam has a national road network of 180,549km, according to the latest data provided by the CIA's

World Factbook BMI believes the sector requires substantial investment as the quality of Vietnam's road

infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 123rd out of 142countries surveyed in its Global Competitiveness Report 2011-2012

Vietnam's railway transport sector has just one operator, the Vietnam Railway Corporation (VRC),

established in April 2003 as a state corporation operating railway transport and related services Vietnam'srail network totals 2,632km The network is of mixed-gauge, comprising 2,105km of 1.000m gauge and527km of 1.435m gauge

Latest data puts the total amount of airports in Vietnam with paved runways at 37, with seven unpaved Thistotal puts the country in a poor 97th place in comparison with other countries.

Road Dominates Freight Mix

Source: General Statistics Office of Vietnam

Vietnam's dense river and canal network provides the country with a highly developed inland waterwaysystem of 17,702km This is the second largest sub-sector involved in domestic cargo transport, accountingfor 25-30% of total transport volumes

Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient

distribution Most large ports are located on rivers, like Hai Phong and Ho Chi Minh City, with limiteddepth at the entrance Some ports are located in big cities, thus making it difficult to connect with othermodes of transport for cargo transfer due to traffic congestion

BMI does highlight, however, the substantial investments APM Terminal has made in Cai Mep

International Terminal (CMIT) since it opened in March 2011 as an important driver of growth In addition

to helping to construct the port, which it did through a joint venture (JV) with Saigon Port and Vietnam National Shipping Lines (Vinalines), APMT purchased two laden reach stackers, an empty reach stacker, two empty container handlers and a 25-tonne forklift - all of which were delivered by Konecranes in 2011.

Weak infrastructure is one of the main factors holding back Vietnam's shipping sector - the country ranks111th out of 145 countries on the World Economic Forum's Global Competitiveness Report on the Quality

of Port Infrastructure As such, APMT's commitment to improving CMIT's facilities is an important stepboth for the terminal and the country's shipping sector as a whole

The Vietnamese government also plans to deepen the Port of Ho Chi Minh City's draught, allowing larger

vessels to access the facility BMI notes that these works are badly needed, as we are seeing a growing

trend for shipping lines to order larger container vessels

Investment And Development Outlook The Vietnamese transport sector requires vast levels of

investment The majority of infrastructure investment in Vietnam over the next 10 years will be in thetransport sphere, accounting for 65% by the end of 2021 Vietnam still suffers from a significant deficit intransportation infrastructure, and we believe the Vietnamese government will continue to develop thissector over the medium term This is reflected in our forecast for transport infrastructure industry value,which is expected to grow by an average of 3.5% year-on-year (y-o-y) between 2012 and 2016

According to our key infrastructure projects database, there are US$171bn-worth of infrastructure projectsplanned or currently under way in Vietnam's transport sector One of the most expensive of these is a US

$3.6bn plan to build the Van Phong International Entrepot The project will begin with the construction oftwo deep water ports in Dam Mon that will be able to accommodate container ships with tonnage of 9,000twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs per year The project iscurrently suspended, however, due to an ongoing review of geological conditions at the site

The air freight sector will undoubtedly benefit from the planned construction work on a new passengerterminal at Long Thanh international airport Costing an estimated US$6.7bn, the work would also

incorporate a new runway, providing capacity for 100mn passengers a year A tender for investmentconsultancy work was under development as of December 2011

Industry Trends And Developments

Maritime

Government Must Delay Launch Of Cai Mep-Thi Vai Port Complex

The launch of the Cai Mep-Thi Vai port complex in the southern region must be postponed by the

government of Vietnam This was requested by Vietnam Business Forum 2012's Infrastructure WorkingGroup and representatives from some foreign-invested businesses providing port services, it was reported inDecember 2012

The complex is designed to handle the needs of seaport group 5, covering Ho Chi Minh City and Southern

Ba Ria-Vung Tau province An investment of US$660mn is required for the Cai Mep-Thi Vai project and amajor share of the total investment has been received from ODA funds

Meanwhile, up to 90% of the construction work on the project has been reportedly concluded so far.However, the Ministry of Transport is still requesting that the Vietnam Maritime Administration go aheadwith a bid to lease the port, which is scheduled to be completed in June 2013 The businessmen said that thelaunch of the port in June 2013 would further increase overcapacity in southern deep-water container ports

DP World Praises Dredging Project

The official start of dredging work taking place at the Soai Rap river in Vietnam at the end of November

2012 was welcomed by global marine terminal operator DP World The USD134mn project is designed to

improve transportation and reduce costs, and should ensure that the navigation channel will become

operational by the final quarter of 2014

The project is expected to take some 10 months and will encompass the dredging of an area some 54kilometres in length, which will enable 50,000 to 70,000 gross tonnage ships to traverse the river, once thechannel has been deepened to a 9.5 metre draft A joint venture, Dredging International NV - ConstructionConsultation JSC for Maritime Building, was awarded the dredging contract back in June 2012

Senior Vice President and Managing Director DP World, Asia Pacific Region, Peter Wong explained: 'Weare delighted to witness the start of this project The deepened channel will be of great benefit to ourcustomers who will be able to transport their products in larger ships and reach markets more quickly thanks

to the new channel capacity

'It will also contribute to the development of the economic zones of HCMC and the South Economic Focusarea, providing a new major transport artery for trade to develop and grow The Saigon Premier ContainerTerminal (SPCT) was designed with this project in mind and we look forward to its completion,' he added.Multimodal

CEVA Logistics And Indo Trans Logistics Group Form JV

UK-based logistics company CEVA Logistics and Vietnam's Indo Trans Logistics Group have

announced a joint venture (JV), CEVA Logistics (Vietnam) The move is aimed at strengthening CEVA

Logistics' position in South East Asia CEVA Logistics (Vietnam) will provide end-to-end integrated supplychain services and will be based in Ho Chi Minh City CEVA Logistics had offered only freight

management services when it began operations in the country 12 years ago

Ceva's managing director for Vietnam, Nelson Chow, boasted that 'this is an exciting time for Ceva inVietnam', while the company's executive vice-president for Southeast Asia, Loo Seng Tak, said: 'Vietnam is

a fast developing market in Asia and is strategically located to be an ideal hub for Southeast Asia andChina There is significant potential for growth in the logistics and supply chain industry in this country.'

Kerry Strengthens Vietnamese Ties

Kerry Logistics has taken another step to growing its brand in Vietnam by purchasing a majority stake in the Hanoi-headquartered Tin Thanh Express with the aim of taking advantage of 'one of the fastest

growing economies in Asia' through a new joint venture, according to the Chairman of the company

The new company, which will is to be called Kerry TTC Express, will aim to synergise the domestic

knowledge that Tin Thanh Express enjoys with the international expertise boasted by Kerry Logistics.Kerry's Chairman Rosa Du explained that 'the new joint venture means that our customers will now be able

to access a complete range of freight and logistics services in Vietnam, across Asia and around the world.'

Roads Construction Potential Limited By Viability Concerns

Road development in Vietnam continues to be hampered by numerous issues, such as declining governmentspending, a non-viable toll road business model, and deficient regulations and government institutions,which cause delays in site clearances and cost overruns We believe these problems are not likely to beresolved anytime soon and we maintain a conservative outlook on construction activity in Vietnam's roadinfrastructure sector

On December 11 2012, the Vietnam Ministry of Transport announced that it would start collecting a fee forroad maintenance from the start of 2013 This is because a number of key roads, including the NationalHighway 1A, are deteriorating rapidly and the government does not have sufficient funds to boost its budgetfor road maintenance - the ministry estimates that it only meets 40% of the funds needed for road

maintenance This announcement comes after the Vietnam Ministry of Transport revealed at the end ofNovember 2012 that its original targets for highway construction between now and 2020 - 2,000km ofexpressways completed and 3,000km under construction by 2020 - are not achievable due to the

government's limited budget for roads and the lack of financing from the private sector

We believe that these difficulties support our view that the financing issues in Vietnam's infrastructure arenot likely to be resolved anytime soon The Vietnamese government is heavily burdened by the debts of itsstate-owned enterprises (SOEs), and the need to repay this debt is limiting the government's ability tofinance infrastructure projects Meanwhile, difficult global economic conditions and stricter capital controlsfor European banks - a major source of finance for Vietnamese infrastructure - over the coming years arelikely to dampen the availability of funds for riskier assets, such as infrastructure projects in Vietnam

For example, the roads sector remains fraught with business environment difficulties, such as slow landclearances, poor planning, corruption, significant red tape and lack of regulatory clarity These issues are adeterrent to foreign investment as they have led to severe delays and cost overruns for many toll roads inrecent years This increase in construction costs is a vicious cycle for toll road development in Vietnam as itforces the Vietnam government to raise toll fees to levels that, in our opinion, are currently economicallyunviable

The Ministry of Finance said in mid-November that the toll fees for the National Highway No.51 - anexpressway linking Bien Hoa city in Dong Nai province to Vung Tau city in Ba Ria-Vung Tau provincewould be doubled for all vehicles for the next 25 years once it is completely repaired Such unattractive toll